SINGAPORE (Mar 5): Commodities supply chain manager Noble Group needs to take more seriously the criticisms that have been levelled at it. On Feb 27, investor Goldilocks Investment Co released a statement that raises some concerns about what Noble has been telling the market.

Among other things, Goldilocks highlights the significant non-cash losses of US$1.5 billion ($1.98 billion) to US$1.6 billion that Noble guided it would report for 4QFY2017 ended December. Some US$0.9 billion to US$1 billion of these losses came from the application of additional valuation adjustments and provisions within Noble’s mark-to-market derivatives portfolio, the result of an increase in the discount rate used.

“This seems to suggest that Noble has consistently overstated the value of its derivative contracts over this financial year,” says Goldilocks. “It also leads one to question why these adjustments were not made earlier, given that Noble already revised its valuation approach to its commodity contracts and derivative instruments on several occasions in 2017.”

Controlled by the Abu Dhabi Financial Group, Goldilocks has an 8.2% stake in Noble. In its statement, Goldilocks says it wants Noble to tell stakeholders “what significant changes in the past three to six months have contributed to this necessity” to add another US$1 billion in impairments.

In a Feb 28 conference call to discuss its results for FY2017, Noble’s management had explained that the discount rate it applies to the valuation of its physical commodity contracts and derivative financial instruments is impacted by credit rating downgrades and the group’s cost of funding. As Noble’s financial standing has worsened over the last two quarters, that discount rate has increased.

But this explanation is unlikely to appease those who recall the concerns that Iceberg Research raised several years ago. Since February 2015, the self-styled whistleblower has produced and distributed online several damning reports on Noble. Its second report, dated Feb 25, 2015, had called attention to the divergence between Noble’s earnings and operating cash flow.

Iceberg attributed this gap to a “remarkable increase in the fair values of unrealised commodities contracts”. At the time, Iceberg had argued that these mark-to-market values were overstated and should be impaired. Iceberg had also suggested in several reports that various units within Noble were overvalued on the latter’s books.

Noble needs to get as many stakeholders on its side as it possibly can. The company has US$379 million worth of 3.625% senior notes due in March. It is currently in negotiations with a group of its senior creditors for a significant restructuring of its existing debts, which will need the approval of multiple parties.

However, equity investors, including Goldilocks, are upset about the huge dilution they will face as a result of this restructuring. Meanwhile, some holders of over 25% of Noble’s perpetual bonds have banded together and appointed law firm Latham & Watkins to negotiate a better deal or “exercise remedies” on their behalf. Noble’s proposed restructuring involves giving perpetual holders US$15 million on a face value of US$400 million. Existing Noble shareholders will end up with just 10% of a restructured Noble while senior creditors get a 70% stake and management holds up to 20% of the company.

On the conference call discussing its results, Noble’s management was asked how it intended to deal with this dissension, given the looming payment deadline. In response, Noble’s chairman Paul Brough said: “The support and the opposition reflect the fact that we are trying to complete the restructuring on a consensual basis outside of any court-driven process, where the positions of creditors are actually governed by insolvency rules and there is little room for negotiation. So, a consensual process should produce a better outcome and it should be less costly than a formal process.”

Iceberg says investors should not buy that line. “The main point we would underline is that Noble is trying to convince everybody that it is either this unacceptable plan or a judicial process. It is a lie once again. There are other options, but they would involve kicking out this failed management, which is long overdue, and appointing an interim CEO who has nothing to do with this scandal,” it says in an emailed response to The Edge Singapore.

It would appear that Noble faces an uphill battle to build credibility and win stakeholder support.

Noble seems to be facing a credibility issue

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Noble seems to be facing a credibility issue

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